Percentage of accounts receivable method

Definition

The percentage of accounts receivable method estimates uncollectible accounts by applying a fixed percentage to the total accounts receivable balance. This method focuses on the balance sheet approach to account for bad debts.

5 Must Know Facts For Your Next Test

1. The method involves estimating bad debt expense based on the ending balance of accounts receivable.
2. It is also known as the balance sheet approach because it focuses on the asset's net realizable value.
3. The estimated percentage is often based on historical data and past experience with uncollectible accounts.
4. Adjustments made using this method affect both the Allowance for Doubtful Accounts and Bad Debt Expense.
5. Unlike the income statement approach, it does not consider current period sales but rather total outstanding receivables.

Review Questions

Related terms

Allowance for Doubtful Accounts:

A contra-asset account that reduces accounts receivable to its net realizable value.

Bad Debt Expense:

An expense reported on the income statement representing estimated uncollectible accounts.

Aging of Accounts Receivable Method: Another balance sheet approach that categorizes receivables by age to estimate uncollectibles.